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Paul Lewis: The unexplained quirks of the FTSE 100

I got into big trouble last week. I only tweeted a few numbers, then a simple sum. But here is what I did wrong. The numbers were the FTSE 100 and if one thing turns off the anger management software in a financial adviser’s breast it is that. I was treated to several mini-essays (you can get a lot in 280 characters) about what a rubbish index it was. 

It was in the news because around the world share prices, at least as measured by indices such as the Dow Jones Industrial average (30 firms and an odd way of combining their data), had plunged to their lowest level since, well, since a very short time ago. We were told the Dow had a record one day fall. That was true in points but not in percentage terms, which is all that really matters.

The 10 per cent fall over nine trading days was fairly routine, a correction not a crash or anything to be worried about. Unless of course you had, on advice, invested a chunk of your hard earned just before the, ahem, correction. Which the professionals told us was inevitable even if they didn’t know – except afterwards – that it would happen that week. 

A time when a monkey with a pin could make a profit

Anyway, in my tweet headed ‘This is not about investment’ I had the temerity to look a long way back, first to 31 December, 1999 where there was a definite millennial peak. Then to 1 January, 1984 when the FTSE 100 was born. That was 16 years before the millennium and from then to now was a shade over 17 years.

Now, I recall the last quarter of the last century as a time when share prices only went one way – up. The new index called FTSE 100 started at 1000 on 3 January, 1984 and ended its first 16 years at 6930, rising in a wrinkly straight line at a compound rate of 12 per cent a year. It was the glory time when a monkey with a pin could make profitable investment decisions and often did. The credit, of course, was taken by the star fund managers, along with big chunks of returns which investors – still making 7 or 8 per cent a year – did not notice.  

Stockmarket-Stock-Market-FTSE-ftse 100-700x450.jpgThis side of the millennium was also a period when share prices only went one way – all over the place. And when the FTSE 100 closed at 7141 on 6 February, it was just 3 per cent higher than where it closed the 20th century. That is a compound annual rise of just 0.19 per cent. Of course over that time it went up and down like a sash window in spring, plummeting three times – most recently by 22 per cent in the 10 months to February 2016.  

The graph of the FTSE 100 from 1984 to the end of 1999 shows it was on a clear upward 16-year trend, if slightly exaggerated by what we now call the dotcom bubble. It was very different from the peaks and troughs and three major falls in the next 17 years.  

I drew no conclusions. I just did the arithmetic and wasn’t even ducking when the volley began. The first missile was why did I not include dividends? Was I really so stupid that I didn’t realise investment returns depended on dividends? The FTSE 100 with dividends reinvested is the FTSE ‘total return’ or TR index. But it is no better a guide to what an investor would make than the bare FTSE 100. The TR does not make any deduction for the costs and charges taken from real investments. So it exaggerates investment returns.

Have markets reached irrational exuberance?

Even in a tracker those charges can be significant and, as Mifid II has shown, largely hidden. In the closet trackers that pass for many actively managed funds they are even higher and will eat away much of the dividends before they are reinvested. The bare FTSE 100 may be an underestimate of real investment returns but the TR index is certainly a great overstatement.  

An index of totally different companies

Then came the grape shot. Did I not realise what a meaningless, poor, unrepresentative, narrow index the FTSE 100 is? Many of its members are focused on business abroad so share values goes up and down with sterling. Every quarter two or three companies leave and two or three join. So historically it is an index of totally different companies.

Then the kick in the head – why not use the FTSE 250 which represents UK companies and the UK economy better? Or the FTSE All Share, ditto? It did not matter how many times I said this was not about investment, but about the FTSE 100 index of shares in the biggest hundred companies listed on the London Stock Exchange. The fall in that was leading the bulletins. Endless investment professionals who had warned that the price of shares can fall as well as rise were asking if this was the major correction they all remembered they had long been predicting. It wasn’t of course, at least not so far.  

So I did the numbers. If the FTSE 100 had risen in the last 17 years as it did in its first 16 it would now be 48,027. Put another way if the FTSE 100 index had grown in its first 16 years as it did in the last 17 it would have closed the 20th century at 1030 not 6930. Whatever you think the FTSE 100 is or represents those numbers are interesting. And so far unexplained. 

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programmeYou can follow him on Twitter @paullewismoney



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. The components of returns vary from time to time.

    Yield’s were below their historic average for much of the 90’s, therefore a higher proportion of returns were derived from the movement of share prices.

    Yields since 1999 have largely been above their historic average therefore the majority of returns have derived from dividends.

    If you want to do a realistic comparison of the FTSE, you can only do it by including all the components of return. By all means, make your own deduction for charges.

    It may well be that the FTSE under-performed in the second period. It has happened throughout history to all Global Equity regions. That’s why we diversify.

  2. Christopher Petrie 26th February 2018 at 2:12 pm

    Why would anyone use the FTSE 100 as a guide to investment returns and not include dividends? Just because dividends incur costs doesn’t constitute a good reason. Sounds like we needs FTSE 100 TR less costs index.

    Then we might be getting somewhere useful.

  3. Trevor Harrington 26th February 2018 at 3:42 pm

    Classic “over thinking” ….

  4. Oh you tease Paul. I assume you are deliberately winding up defensive advisers.If not then I had better explain the answer to your last statement.

    1. You have set the “question” by indulging yourself in a bit of that statistical gerrymandering that you despise when fund managers do it – to choose the cusp as being the mid point high. If you rolled that on three years, you get a completely different answer.

    2. Change in inflation levels between the two periods (the index should be driven by inflation + GDP growth)

    3. Changes in damand for equities from predominantly domestic investors to anyone else but, as a result of regulation of pension funds and insurance companies

    4. Additional costs on companies through extra regulation and transfer of some welfare benefits to companies.

    5. Finally, there was a big setback in underlying GDP growth in 2008 that did nto appear during 1984-99.

    I’m still not sure what the point of your original tweet was beyond this!

  5. Ah, I have just twigged what you must be driving at, Paul. You have been the main presenter on Moneybox since 2000, which coincides with that period of malaise.

    Well I need to crystallise my retirement pot pretty soon, so you I need you to start tending to your courgettes a bit more.

  6. Regardless of background noise, one factor which protects the UK market better than say the US is exactly that it has not gone-up anything like as much. I remember too – you never did invest your money with me in that Balanced Portfolio I mentioned which would have assured you of 4%pa income and lovely capital growth from that low point and from pretty defensive assets too…

  7. Paul, you’re right about the figures and your analysis of the FTSE100. If it’s not about investment or the real world what exactly is your point?

    You make the, seemingly investment, point: “The 10 per cent fall over nine trading days was fairly routine, a correction not a crash or anything to be worried about. Unless of course you had, on advice, invested a chunk of your hard earned just before the, ahem, correction.” Again, so what? If it was within your risk appetite then that’s life. If it wasn’t then you were mis-sold and can make a claim.

    Am I missing something here?

  8. This was a genuinely thought-provoking article, so I decided to run the numbers looking at the total return as well. From 31/12/1985 (the earliest I can run data back to) until 30/12/1999, the FTSE had returned a grand total of 781.14% including dividends, or about 16.8% on average. From 30/12/1999 until 19/02/2018 (the closest I can get to today with the dataset I’m using), the total return was just 96.48%, or about 3.8% per annum – certainly looks far worse.

    That said, the 30/12/1999 data is clearly the high point, so it may also be worth looking at the subsequent low point on 10/03/2003. From 30/12/1985 through to 10/03/2003, the total return was a somewhat less impressive 375.00% (an oddly round number, which is interesting in itself), or 9.5% annualised. From 10/03/2003 to 19/02/2018, the return was 264.47%, or 9.1% per annum.

    This is clearly also an invalid comparison, as it’s picking the lowest possible midpoint rather than the highest, and I suspect that the figures would still be lower in the second half than the first if you picked a “fair” split date between the two (perhaps based on some sort of long-term moving average), but that may have a lot to do with inflation being higher in the 80s and 90s than in more recent years.

    I could probably run the figures again with a measure of inflation included if it was of interest to anyone.

  9. Show us your IMC certificate.

  10. peter mulholland 1st March 2018 at 1:29 pm

    Paul makes a very good point it is a poor benchmark.
    Take S&p 500 and DJ and they have more than doubled on the same comparison. If you take into account £ depreciation 1.5 usd to the pound at the time then it’s even worse.
    Maybe part explained by having so many miners in the index.
    Taking the all share it’s slightly better.
    The local (UK) bias in the index does not seemed to have helped.
    Historically would have been better to dolarize. Given where the UK is I think that’s a safer bet for the future also.

  11. peter mulholland 1st March 2018 at 1:31 pm

    Taking the giddy heights of the s&p over the last 5 years I wouldn’t bet my pension on it though!!

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